Sample 24

cornedovcornedov
in CIA.IFRS17-PAA

For this question, part d would this be a valid answer?

PAA LRC is based on premiums received and acquisition costs at the inception of the contract and so will not be impacted by the legal change. However, this legal change will impact GMA cash flows and so PAA and GMA are likely to produce significantly different results so the contract may no longer be PAA eligible.

Is it true that a legal change would not impact the PAA estimate of LRC?

Comments

  • sidkiriyasidkiriya

    I believe, PAA eligibility is assessed at initial recognition of the group of contracts, so the GoCs already in PAA will continue to be PAA (assuming these legal facts & circumstances were not available when recognizing that group), so their PAA LRC exlc LC should not change. But, separately their onerousity will need to be assessed given the potential change in FCF expectations.

    So, any new GoC recognized post this legal change, let's say quarter end will need to have these changed facts & circumstances considered while assessing PAA eligibility. So in the context of this question, PAA LRC excl LC for the GoCs already recognized should not change.

  • Staff-T1Staff-T1

    Sidkiriya is correct. You would only assess new contracts going forwards and not historically. This is a tough question as I'm pretty sure only people who have done some actual PAA eligibility work will be able to get it.

  • cornedovcornedov

    Thanks that makes sense! I was looking at section 8 of the PAA eligibility paper:

    "If the eligibility criteria are met for a group of contracts, the PAA is used for the duration of the contracts within the group. However, subsequent modifications to the terms of those contracts may result in the group no longer being eligible for the PAA. In this case, the original contracts are de-recognized and recognized as new contracts in accordance with IFRS 17.72."

    But I guess this would only apply to modifications to the contract itself and not change in external environment like a legal change.

  • Staff-T1Staff-T1

    That's right

  • cornedovcornedov
    edited October 2024

    This is probably too technical for an exam question but looking at IFRS 17.72 it seems like change in regulation would qualify as a contract modification that changes PAA eligibility and could lead to de-recognition and new recognition under a different measurement approach.

    https://assets.kpmg.com/content/dam/kpmgsites/xx/pdf/ifrg/2024/ifrs17-first-impressions-2020.pdf

    IFRS 17.72 Contract modification could be a result of an agreement between the parties
    to the contract or a change in regulation. The exercise of a right included in the
    contract is not a modification.

    IFRS 17.72–73, BC317 If the terms of a contract are modified in a way that would have significantly
    changed the accounting for the contract had the new terms always existed, then
    the modification triggers derecognition of the original contract and recognition of
    a new contract. All other contract modifications are accounted for as changes in
    estimates of fulfilment cash flows (see 10.2.2).

    That being said the removal of the cap will result in losses that were previously capped when priced becoming uncapped which would increase likelihood of a contract being onerous and onerous contracts would be automatically PAA eligible since they require a GMA estimate to calculate the LC.

  • Staff-T1Staff-T1

    Good point, I think you are right here - It seems like the graders will accept either a yes or no depending on how you argue it

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